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AllianceBernstein Holding (NYSE:AB)

Q2 2013 Earnings Conference Call

July 31, 2013, 08:00 AM ET

Executives

Andrea Prochniak - Director, Investor Relations

Peter Kraus - Chairman and Chief Executive Officer

John C. Weisenseel - Chief Financial Officer

James A. Gingrich - Chief Operating Officer

Analysts

Michael Kim - Sandler O’Neill

Cynthia Mayer - Bank of America Merrill Lynch

Matthew C. Kelly - Morgan Stanley

Greggory Warren - Morning Star

Operator

Thank you for standing by. And welcome to the AllianceBernstein Second Quarter 2013 Earnings Review. At this time all participants are in listen-only mode. After the remarks, there will be a question-and-answer session, and I will give you instructions on how to ask a question at that time. As a reminder, this conference is being recorded and will be available for replay for one week.

I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AllianceBernstein, Ms. Andrea Prochniak. Please go ahead.

Andrea Prochniak

Thank you, Steve. Hello. And welcome to our second quarter 2013 earnings review. This conference call is being webcast and accompanied by a slide presentation that is posted in the Investor Relations section of our website.

Our Chairman and CEO, Peter Kraus; CFO, John Weisenseel; and COO, Jim Gingrich will present our financial results and take questions after our prepared remarks.

Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosures. So I'd like to point out the Safe Harbor language on slide one of our presentation. You can also find our Safe Harbor language in the MD&A of our 2012 Form 10-K and in our second quarter 2013 Form 10-Q which we filed this morning.

Under Regulation FD, management may only address questions of material nature from the investment community in the public forum. So please ask all such questions during this call. We are also live tweeting today's earnings call. You can follow us on twitter using our handle @alliancebern@cn.

Now I'll turn it over to Peter.

Peter Kraus

Thanks very much, Andrea. And thank you all for joining us for our second quarter 2013 earnings calls. As usual, John, Jim and I are pleased to be here with you today to review our results and answer any questions you have about them. So let's get right to it with a firmwide overview on slide three.

Second quarter gross sales dipped by about 2% sequentially, the impact of a tough June, which I will talk about in a minute. Compared to last year's second quarter, however sales were up 27%.

Net flows of $0.2 billion stayed in positive territory, but were down $2.4 billion from the first quarter. They were up $3 billion however from last year's second quarter. Because the first two months of the quarter were much stronger than the third, we finished with lower period AUM but higher average AUM versus the first quarter. Year-over-over, both were up high single-digits in percentage terms.

If you move to slide four, you can see the impact of the quarter's challenging market dynamics by channel. In institutions, we maintained our momentum from the first quarter. Clients seemed to take the backup in debt markets in stride and remained very interested in our U.S. global and emerging market debt strategies.

Gross sales were up 5% sequentially and redemptions declined by 25%, resulting in our third straight quarter of net inflows. By contrast, investor anxiety in our retail channels spiked along with bond yields. While gross sales remained relatively stable gross redemption soared particularly in June. That caused a $3.4 billion decline in net flows for the quarter that broke our five quarter streak of retail net inflows.

Private client activity declined as well. Gross redemptions were down 7%. The gross sales fell 33% which caused net outflows to pick up. Though they were still only about half in our outflows we saw in the same period last year, gross sales for the first six months of this year were up 50% from the prior six months.

I’ll go into these flow trends in more detail as we discuss the channel highlights. Let's start with those beginning with institutions on slide five.

The chart at top left illustrates the steady margin improvement in this business. Second quarter marked our third consecutive quarter of higher sales and net flows. The year-over-year comps were even better with gross sales up 38%, gross redemption down 68% and an $8.4 billion improvement in net flows.

Year-to-date RFP activity is pacing with last year's level on an annualized basis. We're seeing lots of opportunities around the world and across asset classes. As clear from our pipeline, which is at the top right which is the most diverse it's been years.

During the quarter we had very successful launch of a new commercial real estate debt fund which raised about $750 million. You can see that in the display at the bottom right. We continue to see very strong demand for our select U.S. equity long only and long/short strategies with new pipeline additions totaling $900 million for the quarter.

We also won two emerging market multi asset or EMMA mandate totaling $155 million as clients increasingly seek multi asset solutions to their investment needs. As said, our pipeline declined by $3 billion to $4.8 billion. And as you know, the pipeline has been notoriously lumpy. Fundings are much higher than they had been over the past several quarters in addition to lower.

Pass through activity was a bad average. It was nothing average about fixed income markets during the quarter. So spiking yields in June came in by surprise that's clear from slide six.

We all knew that once economic growth, unemployment and housing prices started to stabilize as said we'd begin tapering of bond buybacks. Yet no one could have predicted how sharply the bond markets would react when the minutes from the Fed's main meeting came out suggesting the committee had discussed starting to taper as early as June.

The 10 year U.S. treasury yield short to 1.8 in early May to 2.5 by June 30th, a 40% increase and investors fled fixed income in growth. June's record $60 billion in total bond outflows wiped out the prior four months of inflows and represented about 1.75% of the industry's beginning inventory.

As you can see from the right side of this slide, rising yields were universal across global fixed income markets. Needless to say, these dynamics affecting our fixed income performance. You can see that on table on slide seven.

Most of our larger services underperformed for the near term though we maintained our long-term premiums. At quarter end, 86% of our assets in services that outperformed their benchmarks for the three year period. For the five years, 92 and for the one year its 87. These are numbers we're proud of across services and regions.

We've always believed it's critical to have assets that behave differently at any interest rate cycle and that's why we built our leading global fixed income platform.

Now I'm on slide eight. Fixed income is not one monolithic asset class but many and they typically respond different to rising U.S. treasury yields. You can see that from the chart at the top left which shows the long-term betas of different bond indices, the weighted index of all U.S. treasuries through March.

You'd expect that U.S. credit or aggregate bond index to have high betas with U.S. treasury, just as you'd expect emerging markets have fairly low beta and high yield, which seem to act more like a stock than a bond to have a negative beta U.S. treasury.

What happened in second quarter however was truly unexpected. That's at the bottom left. Not only did the correlation of emerging market bonds, the U.S. treasuries skyrocket during the quarter. But high yield swung from the historical beta of minus 0.25 through March to a positive 1.24. There are a very few places to hide in an environment like that.

In July we've seen the fixed income market stabilize and nothing has changed about how we run our business. We think we are well positioned for the long term. As you can see from the pie, at the right we have a good sized U.S. credit business, more than half of it is with insurance clients that are less interest rate sensitive and focused on matching liabilities with assets.

We have a meaningful and growing business in short to intermediate munis which fared pretty well during the quarter. This is a good place for clients to be since these securities age in place and you are reducing your portfolio risk for what we hold them.

But we are biggest well in global strategies by global income and emerging markets debt which has either negative or low beta to U.S. treasuries in most environments. In fact clients are most interested in these areas including during the second quarter as they look for more returns seeking fixed income assets to add to their portfolios. So we are very happy with the global and diverse fixed income franchise that we've built.

Now let’s turn to our equity performance which is on slide nine. Here we keep making performance and our efforts to refine our best in classes and deliver better performance for clients. That's coming through in many of our year-to-date and one year performance numbers.

On the value side, U.S. strategic value and global value were a solid positive territory for the quarter and in a strong position for the year-to-date and one year periods. Both rank in the top quartile amongst peers for the quarter and U.S. strategic value was top quartile for the one year as well.

In growth emerging markets, growth continues to improve steadily outperforming for the quarter year-to-date, one and three year periods and ranking in the top quartile for the quarter and the one year.

Meanwhile, we have consistently delivered for clients across a number of strategies by small and mid-cap value international discovery and select U.S. equity. Two things bode well for us in the equity business, one our performance and positioning in the marketplace are improving and two we see better conditions for both stock picking and deep value.

I am on slide 10 now, after a big run up in high dividend yield or safe stock, safe stocks have gotten expensive and with a high correlation to U.S. treasuries they are particularly vulnerable to a (inaudible). The second quarter prove that when the crowded trade of safe stocks begin to reverse and the leading sectors of the prior 12 months like telecom services and consumers stables fell to the bottom.

Meanwhile correlations continue to come down, meaning stocks, stocks are trading based on their individual strength and weaknesses these days in other words stock peaking matters, again that’s the chart at the bottom left.

The chart at bottom right shows how the spread between the cheapest and most expensive stocks by price to book has narrowed by 13% for the peak, yet we are still 87% above the typical trough. So value still looks like a significant opportunity from here.

We looked at all of these factors and feel very good about our value and growth disciplines, so let’s move on to retail which is highlighted in slide 11. As I mentioned that net flows turned negative for the five straight quarters of inflows and redemptions spiked and sales slowed most notably in June. Illustrates just how unusual month of June was for us.

We have isolated gross sales and redemptions trends by month during the quarter in the chart at the top right. Here you can see how sales which kept climbing for the first two months of the quarter dropped by about 50% sequentially in June, just as redemptions surged by 57%.

Most of June spike in redemptions came from our two largest products in Asia retail fixed income, global high yield and American income. Asia is a yield focused market which we talked about many times in the past and we believe the flows that went to cash in June will come back to fixed income particularly in high yield, where rising rates are a good thing.

In fact, global high yield returned to a positive net flow in July, American [income of barbell] approach that invests in both U.S. treasuries and high yield though much improved remains in net outflow. Even with this pull back Asia remains a growth engine for us along with other promising areas like EMEA and Latin America.

As you can see in the chart at the bottom left these three markets contributed to the most, to our first half retail sales growth of 17%, our best half since 2000. Asset gathering momentum among newer offering continues to be a driver as well.

Just as institutions select U.S. equity is in great demand at retail. We raised more than 4 billion so far fueled by this incredibly strong track record. We also celebrated a record breaking local market IPO in Taiwan for our emerging market public debt fund that raising nearly 500 million in five days and was the most successful fund IPO ever by a local or global manager in Taiwan.

Finally our fixed income SMA platform passed the $1 billion mark during the quarter and our tax aware SMA was recently added to the preferred platform of one of our major U.S. distributors, a good sign for future sales as well. Even in a tough June our retail franchise continues to do well as clients everywhere responded to our innovative offerings and strong performance.

Now on the private client, another channel where we keep making progress with our clients, I am on slide 12. While market volatility did give some of our private clients pause during the quarter we did not see the levels that we have in the past, in the past period of market dislocations.

You can see in the chart top left that sales did slow versus the first quarter and net outflows were higher. Second quarter redemptions are always elevated by the April effect when clients pay their taxes but this was our lowest second quarter for net outflows since 2010.

Our advisor base is remarkably stable with no principal proprietary year-to-date and with our investment performance improving our people are having their best conversations in years with clients about financial plans and asset allocation.

We are further proofs that our clients are truly engaged in the results of the independent client survey. We recently commissioned our first since 2009. Response rate was excellent, about double what we expected in percentage terms and nearly half of all respondents voted nine or ten on a scale of zero to ten on the question of whether they prefer Bernstein to others. The ratio of people likely to prefer Bernstein to not likely more than doubled since the last survey.

As important we outscored most of our peers in aspects like service, discipline, invested managerial approach and financial planning, in other words, our clients expressed more confidence in our business model than clients of competing firms expressed in theirs. The newer offerings we have introduced a big factor in improving client sentiments.

You could see from the bottom half of this slide how each one for DAA, the strategic equities to our Fund-of-Hedge-Funds RIC has been additive to performance. We are still not where we want to be but we are delivering on what we set out to do, design investment – to meet our clients' specific needs over the long run.

I will finish up our business highlights with Bernstein Research Services on slide 13. Revenues were up 5% sequentially in the quarter and 12% year-over-year. We were strong across all three of the regions where we operate but particularly in Asia, where we set a new revenue record when trading volumes in the region soared. Our Asia revenues rose nearly 25% sequentially and more than a 130% year-over-year. This is an exceptional business that just keeps building on its success.

For years now global transaction volumes have seen steady declines. Fees have been under pressure and clients embraced the path of differentiated research. Many on the sell side have responded by downsized restructuring, or exiting the business altogether. It's during that time we have grown our revenues captured share expanded our global footprint and either maintained our high rankings or climbed even higher.

We have been relentless in building our global profile and presence as the accomplishments in the right side of this slide demonstrate. We are the only U.S. sell side firm left that still hosts an annual conference that spans our entire coverage universe and this year's was even stronger than last.

We scored high ranking with three independent surveys in the U.S. and Europe this year. In Asia our 11sth analyst went into coverage and we added talent in the electronic trading platforms. I am proud of what we continue to accomplish with our leading global sell side platform.

To wrap up with slide 14, each quarter we are committed putting points on the board for every aspect of our long term growth strategy, in performance even in the quarter's volatile market we kept our eyes on fixed incomes and improved in equities.

On diversification and globalization it was gratifying to see double and triple digit international sales growth at both institutional and in retail. We continue innovating for clients with a successful commercial real estate debt fund launched and a record breaking Taiwan Fund IPO. Finally on our financials I am proud that we have improved our margin to 22% through strict expense management and can tell you we will stay vigilant on our cost going forward.

Looking to the second half we are mindful of the adverse impact that market volatility could have on our performance and our business. We are watching this very closely even as we keep executing on our long term strategy to deliver for our clients and stakeholders to position AB optimally for a future growth.

With that I am going to turn over to John for a discussions of the financials for the quarter. John?

John C. Weisenseel

Thank you, Peter. My remarks today will focus primarily on our adjusted results. As always you can find our standard GAAP reporting in this presentation’s appendix, our press release and 10-Q. Let’s start with the highlights on slide 16.

Second quarter adjusted revenues and expenses were up both sequentially and versus the second quarter 2012. Our adjusted operating margin in the second quarter improved to 22.2% from 21.9% in the first quarter and 16.1% in the second quarter 2012. Adjusted earnings per unit were $0.41 for the quarter versus $0.38 in the first quarter and $0.24 in the prior year quarter.

Now I'll review the quarterly GAAP to adjusted operating metrics reconciliation on slide 17. This quarter there were two minor adjustments that make up the difference between GAAP and adjusted operating income.

First, we excluded the $6 million of investment gains related to the 90% non-controlling interest in the venture capital fund from net revenues. Second, we adjusted for the $2 million in net non-cash real estate charges recorded in GAAP expenses in the second quarter. These were related to true-ups of real estate charges recorded in previous quarters. There were no order real estate charges in the second quarter.

We may record additional true-ups during the second half of the year as we approach the end of the [inaudible] marketing period on flows written-off during 2012 and we compare current sublease market conditions to those assumed in our initial write-offs and adjust accordingly.

At this juncture we still anticipate cumulative write-offs in our previously announced range of $225 million to $250 million related to our global real estate consolidation program launched in the third quarter of 2012, which targets a sublease of approximately 510,000 square feet of office space. Of course additional charges maybe incurred if we were to vacate space beyond that envisioned in the current program.

Now we will turn to the adjusted income statement on slide 18. Adjusted net revenues of $598 million for the second quarter were up 4% versus the first quarter and 10% versus the second quarter 2012. Adjusted operating expenses of $465 million were up 3% versus the first quarter and 2% versus the prior year quarter. Adjusted operating income of $133 million for the quarter increased 6% sequentially and 51% from the prior year quarter. Adjusted earnings per unit were $0.41 and our cash distribution will also be $0.41.

Slide 19 provides more detail on our adjusted revenues. Base fees for the second quarter increased 3% sequentially due primarily to retail and private client increases. The 9% increase versus the prior quarter is due primarily to the increase in retail average AUM.

Performance fees increased in the first quarter primarily due to performance fees earned in the current quarter on one of our equity fund offerings. Bernstein Research Services second quarter revenues increased 5% sequentially due to higher trading volumes across all regions and 12% versus the prior year the result of greater client activity in Europe and Asia.

Investment gains or losses include seed investments, our 10% interest in the venture capital fund and our broker dealer investments. Gains in these investments were down slightly versus the prior quarter but up $3 million from the prior quarter as a result of higher seed investment gains.

We ended the second quarter with $433 million in seed capital investments, down $64 million from the first quarter primarily as a result of net redemptions in the period. Total adjusted net revenues were up 4% sequentially and 10% versus the second quarter 2012.

Now let’s review our adjusted operating expenses on slide 20. Beginning with compensation expense. As you know we accrued total compensation excluding other employment costs such as recruitment and training as a percentage of our adjusted net revenues. We accrued compensation at a 50% ratio in the second quarter in line with both the first quarter of this year and the second quarter of 2012.

Total compensation and benefits increased 3% sequentially and 9% versus the prior year, in each case in line with the increase in adjusted revenues. We ended the second quarter with 3,269 employees.

Now, looking at our non-compensation expenses, second quarter promotion and servicing expenses increased 11% sequentially due to higher travel and entertainment payment and marketing expenses related to client conferences. Advertising expenses for our ongoing US fixed income code breakers and defined contribution campaigns also contributed to the increase. Promotion and servicing expenses were up 9% from the prior year quarter due primarily to higher trade execution cost as a result of increased trading activity and higher travel and entertainment and marketing expenses.

Second quarter G&A expenses of 104 million were down slightly from the first quarter and below our expected range. A foreign exchange revaluation benefit a Lehman claims settlement credit and lower value added taxes in Europe and Asia kept G&A expenses contained. G&A declined 19% versus the prior year.

More than one half of this decline is due to occupancy savings with the remainder primarily from lower professional fees. Total adjusted operating expenses were up 3% versus the first quarter and 2% versus the second quarter 2012.

Now let's move on to slide 21 adjusted operating results. Adjusted operating income for the quarter was 133 million, up 6% sequentially and 51% year-over-year. The adjusted operating margin of 22.2% from the second quarter also improved versus both prior periods in each case driven by higher revenues. Adjusted earnings per unit of $0.41 for the second quarter compared with $0.38 in the first quarter and $0.24 in the second quarter 2012.

The effective tax rate for AllianceBernstein L.P. for the second quarter was 7%, which was lower than expected due to a reduction of a FIN 48 reserve relating to tax audits closed during the second quarter. This reserve adjustment reduced the tax rate by approximately 50 basis points for the quarter.

Finally, as described in our press release and 10-Q, management of AllianceBernstein L.P. and AllianceBernstein Holding L.P. retired all unallocated units in AllianceBernstein L.P. consolidated rabbi trust effective July 1, 2013. As a result, AllianceBernstein and Holdings units outstanding each decreased by approximately 13.1 million units.

AllianceBernstein and Holding intend to retire additional units as AllianceBernstein purchases holding units on the open market. Holding with that issue new Holding units to fund AllianceBernstein restricted Holding unit awards in exchanged for newly issued AllianceBernstein units.

Generally when a corporate entity repurchases its shares they are no longer deemed outstanding. However because of our two tier partnerships structure holding units purchased by AllianceBernstein and held its consolidated rabbi trust are considered outstanding. Management's decision to retire repurchase holding units, rather than allowing them to remain outstanding at the rabbi trust will closely align the effective AllianceBernstein Holding unit repurchases with that of corporate entities that repurchased their shares.

With that Peter, Jim and I are pleased to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Kim with Sandler O’Neill. Your line is open.

Michael Kim - Sandler O’Neill

Hey, guys. Good morning. First just from a strategic standpoint, you continue to build out your alternative product and sales capability as investors continue to ship bigger allocations to these types of strategies. So assuming the gains for alternatives are coming at least to some degree at the expense of more traditional equity and fixed income mandates, just wondering how your institutional business is positioned in terms of that potential trade off?

Peter Kraus

Well, Michael I think -- I don’t want to lead you to believe that we are decommissioning our institutional business in favor, our traditional institutional business in favor of alternatives. I think because if you look at the actual packs of the people on to ground and the number conversations of the progress are making, we’re making progress on both fronts.

In fact, I think the institutional numbers this quarter show some significant progress instead of the more traditional areas in the institutional space. And as investment performance improves in equities we continue to see more and more dialogue with clients in areas that they have not engaged with us on historically.

So I think it’s going to be a two pronged attack. We are adding personnel in the alternative space to help us better engage with clients. And we continue to be focused on the institutional business in the U.S. around the world in the more traditional spaces that we have dealt with.

Some of those more traditional spaces include newer discussions, newer services like factor models that we talked about, factor approach as we talked about, stability equity activities that we have talked to clients about and you could call those alternatives although I think they look more traditional, they are not really hedge funds.

So I think it would be wrong to say that we’re leading the field in institutions. That wouldn't be right and I don’t think either strategically we are trying to do that or even tactically. So I don’t know that you are going in that direction I didn’t want to likely go too far.

Michael Kim - Sandler O’Neill

Understood and then second question, any shift in thinking as it relates to discretionary spending patterns more broadly and then may be advertising, just more specifically given that the recent step up in market volatility?

James A. Gingrich

Michael it’s Jim. We obviously want to balance our investments with the backdrop that we can [process] a business. That said we’re very committed to continuing to invest behind our business and we are managing it for the long haul and I think you saw that in the investments that we made here in the second quarter and I would anticipate us continue to invest going forward.

Michael Kim - Sandler O’Neill

Okay. Thanks for taking my questions.

Operator

Your next question comes from the line of Cynthia Mayer from Bank of America Merrill Lynch. Your line is open.

Cynthia Mayer - Bank of America Merrill Lynch

All right thanks a lot. Actually a couple of questions may be on flows. Just I guess given your rate in Muni you talked a lot about what happened in June but you have a 12% rate in Munis in your fixed income. So what are you seeing in terms of this quarter so far in reaction by channel to that pressure in that asset class?

James A. Gingrich

This is Jim. I would say in retail we continue we are not on mice the rest of the industry which I am sure you follow that data where flows industry wide have remained negative in the Muni space and the nice thing about our private client business is that as you know that’s a very sticky and stable business. And I think we’re seeing trends there much as you would anticipate.

Cynthia Mayer - Bank of America Merrill Lynch

Okay. And maybe could you tell us how DAA performed at June and on the low vol approach does that do you take a low vol approach to fixed income as or is that just really to manage the volatility in equity?

Peter Kraus

Well I will comment on DAA I think we put in the review DAA's performance inception to-date. And I don’t have at my finger tips the quarterly performance but I think it was consistent with the performance that we put in there. We continue to deliver either modest improvement in returns and significant reduction in volatility.

And frankly our clients really like that. At the end of the day clients really want to know that when the market is volatile that we are reacting to that and attempting to reduce their risk to the downside. And that DAA has done that extraordinarily well without removing return and indeed as in most cases actually improving return marginally. So there is no free good or free lunch but so far we’ve been able to serve up pretty good meal.

As it relates to the low volatility services I was referring to, sort of stability services they are predominantly in equities, U.S. international and global. They have outperformed handsomely for their two year time period. Both they have beat the (inaudible) index and they have recently been equal to or better in some cases of the underlying index itself. And that’s unusual since they carry a lower beta generally than the underlying index.

So that’s the service that people are actually quite interested in. It’s not a service that we historically have had but it’s represents the true essence of the AB, meaning an infusion of both quantitative tools but fundamental analysis of stock-up, stock by stock construction of the portfolio and I think that makes us unique in that space.

Cynthia Mayer - Bank of America Merrill Lynch

Okay, thank you.

Operator

Your next question comes from the line of Matt Kelly from Morgan Stanley. Your line is open.

Matthew C. Kelly - Morgan Stanley

Good morning guys. I wanted to follow up on fixed income demand. We heard from some of your peers about kind of a rotation within fixed income versus between different strategies fixed income to equity. So I guess I’d just ask if you are seeing any increase in sort of global mandates or the unconstrained bond strategy, emerging markets that sort of thing in July after a lot of end of the second quarter movements from in?

Peter Kraus

So Matt it’s a good question. Number one is I did mentioned in response to Michael's commentary on institutions that we also have seen a consistent actually increase for us in demand for global credit in the institutional space but that has been consistently increasing demand from our institutional clients for that product and I think that does reflect a realization on the part of institutions that it really doesn’t make any sense to constrain your credit exposures if you are a U.S. entity to just U.S. credit.

You know you are cutting off 40% or 50% of the world when you do that and it just can’t be that all the best credit available for any risk level, all over the United States or in dollar terms. So I think that that is a trend that has continued right through July and I don’t think was affected by the volatility of fixed income.

I think what we did see as a result of volatility is clearly investors selling higher yield securities. That was the issue for June. As I mentioned in my comments we saw that in the global high income fund really turnaround and go positive in July.

So it appears to us that investors are doing what they had been doing which is seeking yields at a very low interest rate environment. We did see some rotation in that investor environment to shorter duration yield funds and that continues to be an improvement for us as well in our short and intermediate duration securities, both muni and taxable bonds.

Also your comment about unconstrained bond and [AMA]. Unconstrained bond funds and [AMA] which is combination of equity and bonds does continue to see inflows. I think that’s part of the multi strategy or multi asset strategy trend as much as it is anything else and that also continues unabated.

Look I think June was a not unexpected, purely the volatility that were likely to have going forward as rates were high. We have been through a long period of rates declining which has had a tendency to damp volatility and make investors comfortable to own higher yield securities that have not only coupon returns to them but capital returns and as rates fall, as rates start to go up firstly they are not going to go up evenly every day. As markets expectations change you are going to see much more volatile moves in rates to the upside that we saw in June.

That’s not going to be the last time we see that. And I think that investors are going to continue to make their selections based upon what the short term yields are which right now are still very low and we expect to be low for a long period of time and what their risk mentality is which I think you have heard from most of the industry, we haven’t seen that great rotation yet and I don’t think we will until we see an extended period of losses in bonds and clients beginning to understand that they are just not going to get the kind of return in coupons, less capital returns on bonds they have gotten used to.

James A. Gingrich

I would just add that our view of where the fixed income market is going to go in terms of unconstrained global like investing has been a long-term view. It maybe catalyzed by some of the changes that we are seeing in the marketplace today but as Peter walked through how we have tried to position that business we think we are very well positioned for the direction that the market is likely to move in.

Matthew C. Kelly - Morgan Stanley

Okay, that’s helpful. It makes sense. Just a quick follow-up. Jim you mentioned you continue to spend behind the business. Obviously the adjusted operating margin continue to go up. Just curious if there is some other volatility in rates rise and other rates rising environment if fixed income funds go down, pressuring some of the base fees and flow. Should we be thinking about the margin as consistently going higher. There could be some you know near term volatility in such a scenario where know there is so much you can hold back on certain expenses.

James A. Gingrich

You know Matt I think that we have indicated there is operating leverage on the upside that means by definition there is going to be operating leverage on the downside. You know what we, as I indicated and I really don't know what else I could add because we are cognizant of the overall backup but at the same time these are all businesses that we want to invest behind and build for the long term.

Peter talked a lot about for example what we have done with our sales side business where we continue to invest behind that business despite what’s been a very difficult volume backup for the industry for the last five years and we think that those investments have proven themselves and paid-off and we feel the same way about some of the other investments that we are making as well. So I wouldn’t anticipate us stepping back from managing the business for the long call.

John C. Weisenseel

Matt, this is John. Just to add to Jim’s comments regarding the base fees on the portfolio. I mean entire portfolio it’s been actually remarkably fairly steady if you go back and look at the past several quarters. I think for the second quarter it’s about 40.7 basis points so it’s been consistently just above the 40 basis points in line and to add to Jim’s comment as well. I think as far as the margin expansion to the upside it's really dependent upon the revenue side and how fast and how much revenue moves. Jim mentioned lot of operating leverage to the upside.

Matthew C. Kelly - Morgan Stanley

Great, thanks for taking the question guys.

Operator

Your next question comes from the line of Bill Katz with Citi. Your line is open.

Unidentified Analyst

I this is Steve [inaudible] filling in for Bill. Just looking at slide eight where you breakout the percent of credit that is insurance clients, should we assume the rest is retail or private client and what’s kind of the mix of that and can you quantify that at all?

Peter Kraus

Well you should assume that the balance is exactly that. I don't think we breakout those differences. But is there something that you are looking for behind your question, is there something I can help you with there?

Unidentified Analyst

Let’s say you talked about July stabilizing so was that stabilizing in terms of flows, performance and was it stabilizing in that bucket I was talking about?

Peter Kraus

So look, volatility in June was primarily focused on the retail aspect of fixed income and what we wanted to make clear to you is the significant change that occurred in July where those retail fixed income funds, in one case the global high income funds was positive in flows that is significant turn out, negative deposit and a significant reduction in net out flows in the American income fund. I wanted to make sure that you understood that, that stability was actually being reflected in the flows.

Unidentified Analyst

Okay, great. And then just one more on research services, strong growth there, particularly in Asia. Should we think that this is a standard level and for this quarter and just any color you have on kind of strengthen in Asia with the new rollouts there?

Peter Kraus

What we have been doing in Asia again quite consistently we are little bit like the army just one step at a time. We have continued to launch new analysts. We said this quarter we launched our 11th analyst. It’s obvious that we are gaining market share in Asia. As Asia grows in trading volumes we will continue to at least have our share or get better.

We are consistently growing our share and we would expect that to continue for a while as we establish ourselves in that marketplace. We believe we have a differentiated investment product in that marketplace. So far the results seem to indicate that pretty clearly.

And we went to Asia because we believe cyclically that was greater growth in Asia end markets than there would be in the traditional developed space U.S. and in Europe. And so I think that thesis has been proved to be correct for us. And we would expect that to continue the rate at which it continues is clearly going to be driven by the rate of volume in all the markets including Asia. And that of course could decline and that of course could grow. In the last quarter it was actually pretty robust.

James A. Gingrich

I would agree with everything Peter just said I would just take note of some of the data that we provided you because clearly that market benefited in the quarter from some of the increased volumes, particularly in Japan because of some of the economic changes that've taken place there.

Unidentified Analyst

Okay. Great. Thanks a lot.

Operator

(Operator Instructions). And your next question comes from Greggory Warren from Morningstar. Your line is open. Mr. Warren from Morningstar we cannot hear you.

Greggory Warren - Morning Star

Sorry about that? I just had a couple of questions here on the flows. I am looking at the flows by channel and then also I am looking at it by asset class. The influence here is that the retail outflows were primarily in the equity channel. And that the institutions were primarily propping up the fixed income. I may be reading this wrong based on some of the comments you guys you have and what’s going on in the fixed income market in Asia which I assume is more in the retail side.

But can you clear that up a little bit there and then also since Asia is an important driver going forward what’s the market environment like there. Was it an emerging markets scare that really drilled down the flows during the quarter, because I can’t really see it being a fixed income the U.S. rates rising issue.

Peter Kraus

So on the June issue in redemptions was not entirely but largely focused on global fixed income. If you look on page 31 you will see at $11.8 billion redemption in global non-U.S. fixed income. And that’s in the appendix and you may want to take a look at that. So I don’t want to lead you to believe that we did have redemptions in other parts of the businesses because of course we did. But the major change in the trend was in the global fixed income market which was predominantly not entirely but predominantly Asian retail.

And again that’s why we want to make sure you understood that happened in July.

Greggory Warren - Morning Star

Okay. And then to walk back from that you had 11.8 billion in out flows and fixed income so I am assuming you have to have yield more than that and inflows and where was that coming from was it institutional mandate or is that retail to sort of offset so you end up the quarter with 2.3 in positive flows?

Peter Kraus

Well of course there are three channels that are affecting fixed income’s total number of 2.3. It is that retail and institutional and of course some private clients’ money flows in there as well. So it's all those channels Greg and just to give you some characterization of that we talked about global bonds, global credit that has been an increase in the institutional space. Of course we continue to have sales in Asia and in the United States and in Europe for global bonds in the retail side and American high income. And I’ve mentioned that we had some rotation because I think Matt asked this question what was going like inside of fixed income we had some rotation in the shorter duration taxable bonds and we saw some inflows in there as well, as well as the multi asset in unconstrained bond area.

So I think that the outlier if you look at the trends was what happened in June in Asian retail fund.

Greggory Warren - Morning Star

Okay. Because I was just trying to get the sort of that notion that even though you got hit with significant outflows in one piece of the business on the fixed income side you offset it with flows back in and other pieces, which speaks to the improvement strength of the business. That's what I was trying to get.

Peter Kraus

Thank you.

Greggory Warren - Morning Star

Okay, thanks guys.

Operator

I am showing there are no further questions at this time. I will turn it back for any closing comments.

Andrea Prochniak

Thanks everyone for participating in our conference call this morning. You can feel free to contact investor relations with any follow-up questions you may have. Thanks and have a great day.

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